On-Floor Seminar at The Trading Show Chicago: Dynamic Hedging of Counterparty Risk
Dr. Bielecki presents the mathematical derivation for dynamic hedging of counterparty credit risk by formulating it as a derivative, which one can dynamically replicate.
He also introduced the concept of credit value adjustment (CVA), which is the adjustment due to counterparty risk to the price of an instrument or contract without such a risk (the clean value). The CVA can be viewed alternatively as an option, a so-called Contingent Credit Default Swap (CCDS) on the clean value of a contract.
With this formulation, Dr. Bielecki then proceeded to derive its dynamics and hedgeable terms under a Markovian Copula Model.
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